Craig Benton is the Senior Director of Valuation Services at Synovus Bank
Editor’s Note: This guest post is an excerpt from the LightBox CRE Expert Predictions for 2024.
The challenge for appraisers today is to prove that what clients are telling them is accurate, which is something that’s a lot harder to do now than it was a couple of years ago. As far as the price point, appraisers might come in with a price per square foot and cost approach. It isn’t great, but if it’s done well, it can be all right.
This underscores the importance of internal stress testing. And, the question mark is always, what cap rate should be used for the stress test? What is a reasonable number to use without penalizing it too heavily, but that reflects the risk that may or may not be present?
A Look Ahead
- There is debate over a recession, but it hasn’t happened yet. It’s not going to be a real estate led recession. We’re not going to have 40% drops in values across the board like we saw in the last financial crisis. Obviously, there are certain asset classes, such as office, that will take a heavy hit, but valuation drops will be very market and sector specific.
- Interest rates are going to stay where they are until midyear 2024 and then the Fed will have to start cutting rates or we will really be digging in pretty deep.
- The majority of the home buying and selling is driven by people who have to make a move. There’s a heavy spill over into commercial real estate and the significant drop in transaction volume. Our customers who are single family residential (SFR) realtors and appraisers are experiencing significant reductions in year over year cash flows.
Interest Rates in 2024
Interest rates will have to come down to unglue these deals. Nobody wants to do deals at a 7% to 8% interest rate, but if rates go down to 6%, it will loosen things up.